View: Buy; Tgt Price: Rs 500
3Q miss on weak topline growth, expect better quarters ahead:Alembic Pharma (APLL) 3Q results disappointed with PAT of Rs 707m (up 7% YoY, 14% below QoQ) due to weaker sales growth (mainly exports). Sales at Rs 5.1b grew by mere 6% as export formulations (29% of sales) registered decline (down 4%). Consequently, EBITDA fell 13% at Rs 1b (flat YoY).
Muted export performance weigh on revenue growth:International generic (29% of sales) declined 4% YoY to Rs 1.4b and was a negative surprise. Sluggish revenue growth in 3Q was attributed to:
(1) discontinuation of low-margin CRAMs business,
(2) price erosion in key products in US (gCymbalta, gMicardis) and slower mkt share gains in recent launches and
(3) weak Azithral sales (11% of domestic sales) due to high base of last year. Domestic growth at 12% YoY was marginally below expectations even as share of specialty segments (56% of domestic sales) continue to rise.
Traction in niche US launches to shore up profitability:
3Q margins at 19.7% (down 122bp YoY) lagged expectations of 20.5% as weaker sales hurt operating leverage. We expect EBITDA margin expansion over FY15-17E to be driven by:
(a) thrust on high margin specialty products in India,
(b) monetization of differentiated US pipeline (30 ANDAs pending, mostly Para IVs) through own frontend and
(c) reduced contribution from API (from 17% now to 12% in FY17E).
Consequently, APLL's PAT to grow at 33% CAGR (FY15-17E).
Strong outlook over FY16-17E:
Though FY15E EPS could be marginally impacted by 5% due to slower pick-up in US sales, APLL is expected to increase the pace of new launches (6-8 annually), including high impact launches like gAbilify, gNamenda, etc and hence expect to drive 28% CAGR in exports (key growth driver).
APLL, thus, is expected to deliver strong earnings growth (33% CAGR), among the highest in mid-caps backed by robust capacity addition, focus on high margin specialty products in India and monetization of US pipeline.
Valuation and view:
APLL’s business profile has undergone a transformation led by renewed efforts by management team to invigorate domestic growth and rapid expansion in export front. This has resulted in marked improvement in profitability and return ratios, likely to sustain over medium term. However, the re-rating undergone over the past 12 months does not adequately reflect this improvement.
With increased earnings growth visibility and strengthening balance sheet, we feel stock could quote at a PE multiple of 18x, which is still at discount to the sector average. Though this is higher than the historic P/E average, we believe the company should be looked at differently now, given substantial change in governance standards and business outlook.
Investors may gradually accumulate the stock with a Target Price of Rs 500 which implies 25% from CMP. In fact, stock has potential to be re-rated further as the company becomes debt-free and achieves sizable scale in US generics and Indian formulations market.
Key risks: Delay in regulatory approval for key US launches and failure to comply with US cGMP requirements.
